Cablegate: Turkish Markets End Year On Bullish Note

Published: Wed 31 Dec 2003 10:12 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. (Sbu) Summary: Despite news that would normally buffet
the market--in both directions--Turkish debt and foreign
exchange markets have been notably calm, with a positive
trend in recent weeks. In thin trading close to the year-end
balance sheet date, interest rates on GOT debt have
gradually declined in a narrow range while the lira has
gradually strengthened. The more volatile stock market has
continued its 2003 rally to reach a three-and-a-half year
high. But even the stock market has not been prone to the
sharp movements that were common earlier in the year. End
Lots of news--little volatility:
2. (Sbu) There has been an abundance of potentially
market-moving news in recent weeks, both negative and
positive: the deadlocked Cyprus election results, IMF Board
Approval of the Sixth Review, the forced resignation of the
bank regulatory board Chairman, the passage of the 2004
budget, and increasing indications that the GOT will hit or
come close to its year-end growth, primary surplus and
inflation targets. In recent days, there have also been signs
of renewed GOT attempts to throw out populist bones, such as
the above-inflation increase in the minimum wage or the
proposal to remove names from banks' list of bad creditors.
3. (Sbu) While none of these events would be expected to
cause huge rallies or dizzying falls in the markets, in
earlier months they might have caused sharp movements.
Instead, in recent weeks, markets have tended to take
everything in stride, either trading sideways or moving
gradually in a positive direction.
Interest Rates Continue their Long, Downward March:
--------------------------------------------- ---
4. (Sbu) The market for government securities, for example,
despite a heavy calendar of debt redemptions and issuance,
has continued to experience a slow but steady decline in
yields, as inflation expectations and, perhaps, the Turkish
government's risk premium, gradually come down. The interest
rate on the benchmark bond, for example, declined from 28.54
percent on December 5 to 25.63 on December 30. Unlike
earlier this year, the rates rarely moved back up--or fell
sharply--but tended to trend down very gradually.
Lira Stays Strong:
5. (Sbu) The Turkish lira continues to defy gravity. While
economic theory would suggest that a high-inflation country's
currency cannot maintain or even increase its nominal value
for a sustained period, the Turkish lira has done exactly
that over the past nine months. As previously reported,
local analysts have attributed the lira strength to a
combination of reverse currency subsitution--i.e. Turks
moving foreign exchange holdings into lira--foreign
portofolio investors and inflows from Iraq. With most
economists expecting a nominal decline in the exchange rate
sooner or later, the persistence of lira strenth in December
is notable.
6. (Sbu) Since December 5, the dollar has declined from TL
1.444 million to TL 1.401 million December 30, and was
trading below TL 1.4 million during morning trading December
31. Most of the decline in the nominal TL/dollar rate is
attributable to the sharp decline in the dollar/euro rate in
recent weeks, as can be seen by the much narrower range in
which the TL is trading against the Euro: TL 1.748 million on
December 5 and TL 1.746 million at the close December 30.
(In between these two dates, the Euro strengthened slightly
against the TL, but overall has been relatively stable).
Though the Euro rate is in some ways a more meaningful
indicator since Turkey trades far more with Euroland
countries than with dollar or dollar-linked countries, the
lira-dollar rate has important psychological value here.
Also, against a basket of its trading partners' currencies,
the lira is still appreciating slightly in nominal terms, and
substantially in real terms.
7. (Sbu) One veteran local market-watcher and a Central Bank
official separately told Econoff that the strengthening of
the lira in the past few days is due to lira demand to make
year-end tax payments and, especially, due to heavy lira
purchasing by Turkish banks. Both noted that a stronger lira
helps banks' year-end balance sheets, though the Central
Banker stopped short of the private analyst's allegation of
market manipulation by the banks. According to the Central
Bank official, Turkish banks went long in foreign exchange in
October and November, expecting the decline in the lira to
continue. Since that has not happened, and the markets are
generally quite optimistic about 2004, the banks have piled
back into lira in recent days. He noted that the Bank buying
was strong enough to counteract substantial lira sales by oil
refiner Tupras and pipeline company Botas in recent days.
The Central Bank official added that the Bank is considering
resuming the foreign exchange purchases it stopped conducting
two months ago. But rather than act based on thin and quirky
year-end trading, the Central Bank will probably await next
week to take a decision.
Equity Market Continues to Hit New Highs:
8. (Sbu) Though it has been less volatile than earlier in
the year, the stock exchange has continued to move in a
positive direction. Even after the market-worrying Cyprus
election deadliock, the stock exchange hardly reacted.
Overall, the cumulative rise over the past three weeks has
been impressive: the IMKB 100 index rose from 16,913 December
5 to 18,541 at noon on December 31, a ten percent increase.
The stock exchange is now at a three-and-a-half year high.
Comment on Volatility:
9. (Sbu) The Central Banker agreed that the market seems to
ignore bad news and move up on good news, but that Turkish
markets are noticeably less volatile. It's not yet clear
whether factors unique to the year's end are the principal
reason for the volatility or whether something more
fundamental is at hand that could continue into the new year.
At least in part the lessened volatility seems to be linked
to a perception of increased stability in the Turkish
economy, leaving market participants less inclined to bolt or
buy at the slightest news.
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